Most sellers enter into overage agreements with an expectation that the developer intends to build out in accordance with a planning permission (once obtained) and then sell to realise a return (hopefully generating a further overage payment). What happens, however, if a developer builds out and then decides not to sell (avoiding a trigger and indefinitely delaying payment of overage)?
Sparks v Biden
In the case of Sparks v Biden [2017], Mr Sparks (the seller) granted an option in 2005 to Linkwood Consultants Ltd to purchase land in Wimbledon (which company subsequently assigned the benefit of the option to Mr Biden (the buyer)). The option was not on “standard terms" and each party was represented by “reputable commercial conveyancing solicitors”.
Under the option, the purchase price of the property was set at £600,000 (later reduced to £500,000 in return for building work carried out by the buyer for the seller) and overage agreed at a third of sales in excess of the first £1.5 million received from the newly constructed dwellings. The seller was in any event to receive a minimum payment of £700,000 by way of overage in addition to the purchase price (any balance being due after the sale of the final dwelling).
The option required the buyer to apply for and use "all reasonable endeavours to obtain" planning permission. Outline planning permission for development of eight houses was obtained in February 2007 and construction took place between March 2012 and February 2015. Instead of selling the new dwellings, however, the buyer occupied one and let the others on assured shorthold tenancies.
The option agreement contained no express term requiring Biden to sell (nor indeed preventing such lettings or occupation). Biden maintained he could delay indefinitely payment of overage by not selling any one of the new eight houses.
The seller argued that Biden’s approach undermined the whole working and underlying purpose of the option agreement and that a term should be implied that required Biden to sell each of the newly constructed houses either “as soon as reasonably practicable" or "within a reasonable period of time" of the relevant dwelling being constructed. Why would the seller have sold the site for only £600,000 if (in unchallenged evidence) the seller estimated the value of each of the new houses as not less than £700,000 (and possibly +£800,000) in any event?
The presence of an entire agreement clause was a factor, but on the facts not a strong one. So too the fact that both parties were represented and the documents negotiated and not in "standard form".
The key factor for the judge in concluding that a term should be implied requiring a sale was the structure whereby the buyer was to use all reasonable endeavours during the option period to obtain planning permission (including pursuing appeal if prospects of success were more than 75%), after exercise of the option to proceed "as soon as practicable" to construct the development (together with the obligation to pay overage once any of the newly constructed houses were sold in the minimum sum of £700,000), and the obligation to pay overage once any of the new houses was sold. These obligations were clearly incorporated on the basis that there was a view to realisation of the value of the development and (from the seller's perspective) payment of the overage.
What did the court decide?
In the court’s judgment, a clause was to be implied into the option agreement to the effect that the buyer was under an obligation to market and sell each house constructed as part of the development within a reasonable time. This was necessary as a matter of business efficacy and without it the option agreement lacked practical or commercial coherence. The court also considered it was such an obvious clause that it "goes without saying".
Although the seller was eventually successful in this particular case, each case will turn on its own individual facts and there is no guarantee that a court would reach the same conclusion in another matter in similar circumstances. Parties should not have to rely on caselaw to plug gaps in documentation (which will likely in any event lead to costly and time-consuming litigation). It would of course have been preferable for the seller and its advisers to have considered more fully the circumstances that may apply, how best to document intentions if different eventualities arose, and to have had more control built in to the option agreement dealing with how the developer could or should use the properties once built out. This would certainly have left less scope for argument over the obligations in the option agreement (implied or otherwise).
How can Burges Salmon help?
Our real estate development and real estate investment teams provide specialist advice to businesses and individuals on all aspects of developing and investing in UK real estate. If you would like to discuss anything in this article or any other real estate related matter, please speak to your usual contact at Burges Salmon or Richard Clark.
This article was written by Alix McKenzie-Wain.